INFORMATION #2 04-17-2017 } Information
City of Memorandum
Elk
River
TO: Mayor and City Council
From: Lori Ziemer,Finance Director
Date: April 17, 2017
Subject: Quarterly Investment Report Uanuary—March, 2017)
Introduction
The purpose of this report is to update the City Council on the status of the various
investments the city maintains. This report is as of March 31, 2017.
Background
The investment policy was originally adopted in April, 1998,with subsequent modifications
in 2007 and 2014. The policy complies with state statutes and generally follows the
Government Finance Officers Association (GFOA) model.
The investment goals for the City of Elk River are passive in nature due to the allowable
investments permitted under state statutes. The city has four objectives for investing,in
order of importance,they are; 1) safety of principal,2) liquidity, 3) return on investment,and
4) maintaining the public trust. This means we are focused on not losing on the original
investment,having sufficient funds on hand to meet ongoing operating cash needs,getting a
market rate of return,and not purchasing speculative investments.
State statutes limit the city's ability to invest in many risky types of investments. The city is
generally limited to federal and state government obligations or agencies backed by them.
The city can invest in short-term commercial paper (highly rated), certificates of deposit or
money market accounts (with collateralization if in excess of FDIC insurance amounts), and
the rated debt of local governments. The city does not purchase stocks or mutual funds.
The city intends to hold investments until maturity,which means we will get the rate of
return for which we invest our funds. Our goal is not to extend our maturities beyond 10
years unless we are matching cash flow to a specific debt service payment.
The finance staff makes sure the city is sufficiently liquid by continually updating our
forecast on the anticipated cash flow needs over the next five-year time horizon. We also
build in a reserve balance in case of unexpected expenditures; these funds are maintained in
P 0 W I R I 1 0
N:\Public Bodies\Agenda Packets\04-17-2017\Final\xInform2 sr Investment Report.docx AUR
money market accounts. We anticipate we will have two large tax settlements each year,
along with the regularly-scheduled debt service payments.
The Treasury yield curve has increased in short-term yields from December 30, 2016;
however,yields for longer term investments have not experienced the same rate of increase.
Most recent purchases have been credit quality certificates of deposits (CDs). CDs have
been several basis points over agencies with call features. Investing in shorter-term
investments has presented far fewer options since the decline in the commercial paper
market. Three-month notes are yielding 0.76% and the 10-year notes are 2.40%. See the
graphical illustration below:
Treasury Yield Curve
3.50% -
3.00% -
2.50% —
2.00% -
12/30/16
1.50% 3/31/17
1.00%
0.50% —
0.00%
1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
Cities generally use a short-horizon benchmark such as the two-year Treasury Bill (3/31 —
1.27%,with an increase from 1.2% on 12/30) or some similar measure. Our current
portfolio yield is roughly 2.23%which is several basis points over the treasury yield
benchmark. This is calculated by taking the yield times the current value for each investment
and dividing the resulting amount by the total portfolio value. As investments purchased in
earlier years mature,we will be able to replace them and lock into some longer term interest
rates, but they may have to be reinvested at lower interest rates as market conditions change.
It is typical to lag the market as interest rates change. This will lead to more predictability in
our interest earnings.
Our primary reserve account is our 4M Fund which is a money market account where many
cities pool their funds. It currently yields 0.5%with daily withdrawal privileges. The city
strives to maintain a strong diversification portfolio so liquidity and exposure risk are
reduced.
Attachments
■ Investment summary
N:\Public Bodies\Agenda Packets\04-17-2017\Final\xInform2 sr Investment Report.docx
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